When it comes to making decisions for a business, there are lots of factors that need to be considered. But undoubtedly, the most important factor in any business decision-making process is the finances.
Finance is key in any business decision-making process, from developing budgets and setting financial goals to determining the best way to invest available resources. Knowing the financial implications of different decisions helps managers and business owners assess risk levels, determine which options make the most economic sense, and make sound decisions.
In order for a company to invest in a new manufacturing unit or consider divesting from a product category, a thorough financial analysis is necessary. This involves assessing the current state of the business and its ability to fund such a significant undertaking. Decision-makers must also evaluate the potential future profitability and weigh the cost-benefit of the decision. If a product category is not generating profits and is unlikely to do so in the future, divesting becomes a simpler choice. Ultimately, sound financial planning is crucial in these kinds of business decisions.
Through the above examples, it is evident that finance is one of the major considerations when it comes to making business decisions. However, the role of finance extends beyond investment and divestment in projects. Here are some of the major ways finance aids in business decision-making:
1. Financial Analysis
The success of every project is vital to ensure business growth and prosperity. In case of poor project performance, the management is responsible for identifying and addressing the underlying issues. For this reason, many companies seek the expertise of financial analysts who possess the necessary knowledge and business sense to provide a holistic solution. Their proficiency in financial matters and acute business acumen enable them to recommend effective strategies for change.
Aspiring professionals must ideally enroll in business administration in accounting programs to study financial analysis in depth. During the course, they learn to analyze and interpret financial data, determine the best methods for improving operations, and help companies make rational decisions.
2. Asset Management
Finance also plays an important role in decision-making regarding company assets. Assets include anything the company can use in the present and future. It could include property assets, inventory assets, and even financial assets.
So, if the company wants to invest in a new outlet, the finance department can help decide to either invest in the property or sign a rental agreement. Finance executives do this by assessing the cash conversion cycle of each asset. Then, they compare it to industry averages.
After onboarding the assets, they are recorded in the accounting books. It is up to the finance executives to develop financial statements for the company. If the company is publicly listed, it is up to the finance department to decide the stock dividend to the shareholders and the amount to reinvest in the business. They must consider that a higher dividend means a better value for the company.
3. Investment Decisions
As mentioned above, finance is important in making project investment decisions. For example, a company is planning to invest in a new project. If the project revamps the brand image of an existing product, finance executives can help assess the costs that will go into a project of such a scale. Finance favors the project once these costs are clear, and analyses reveal that the revamping strategy is forecasted to yield better sales.
The reason why finance is given so much importance when making investment decisions is that finance is the heart of the business. This is where the cash flow comes from to invest in the project, and it is where the profits of a successful project will go.
This is probably the reason why the C-suite employees consist of the CEO (chief executive officer), the CTO (chief technology officer), and the CFO (chief finance officer). When all three departments approve the decision, the company can advance.
4. Budget Planning
Since finance is where the money for operations comes from, it is also responsible for budget planning. So, each year, the finance department allocates a certain budget to sales, marketing, HR, and other departments. This allocation is based on the previous budget and considers the new ideas these departments plan to implement.
For example, if the company plans to open its manufacturing facility in a few months, HR will be given a greater budget to hire people for this facility. However, it is up to the HR department to outline the budget that it will require depending on the project’s scope. The finance department still assesses the expenses after being presented with the proposals rather than immediately accepting budgetary demands. The finance department representatives can also give suggestions to make cuts in expenses.
5. Freeing Cash for Projects
The finance department doesn’t keep all the company’s money in banks. Since money depreciates over time, it is up to the finance department to determine the right mix of financial assets. Finance needs to keep liquid assets for day-to-day operations. So, some of these assets are highly liquid, like cash. Some are liquid to some extent, like T-bills. On the other hand, some cash is invested in high-return, long-term projects.
When it comes to decision-making regarding new company projects, the finance department must consider which assets to unfreeze. Finance gauges the amount of money needed to run the project and any additional money needed to sustain the project. It then decides to make alterations to the company’s financial asset profile.
6. Optimizing Taxes
A company has various expenses. Amongst these expenses are taxes. The finance department’s role is to assess where they can save the company tax money. Even when considering new investments and projects, the finance department must consider the tax implications of the project and the after-tax returns to the company.
The finance department also must ensure that the company pays all the taxes due. This way, the company wouldn’t have any issues with the regulatory authorities.
Finance is one of the core components of a business. Not only does it monitor where the money goes and from where it comes in, but it is also involved in the major decision-making of the company. Business graduates who have majored in accounting are important assets to organizations. They help businesses to make financial analyses and contribute to making important decisions.